CIMB Research keeps reduce call for Gamuda, TP RM2.18 on MRT 2

For Gamuda

KUALA LUMPUR: CIMB Equities Research retains its reduce call for Gamuda Bhd with a lower target (TP) price of RM2.18 compared with its last traded price of RM2.38.

It said on Wednesday the MRT 2’s underground contract cost renegotiation will resume despite a termination order by the Ministry of Finance.

“We expect the outcome of MRT 2 underground cost reduction to be net negative to Gamuda. We cut FY19-21F EPS by 8-11% (23-60% cut in MRT 2 scope).

“Low job termination risk and retention of MRT contract look largely priced in (+15% off its multi-year low). Reiterate Reduce with lower RM2.18 TP,” it said.

CIMB Research said due to the challenging overall outlook for the property and construction sector going into 2019 and heightened earnings risks for construction, it has taken a more conservative approach in its RNAV calculations. 

It lowered its fully diluted realised net asset value (RNAV) a share by 29% from RM5.08 to RM3.63 to largely reflect the following:

1) Lower sustainable net profit on the base-case that Gamuda retains the MRT 2 underground contract, reduced by 60% for the remaining RM1.9bn (50% share) of the job value, and assuming that it yields a minimum 6% pretax margin (assumed 10% previously), i.e. the minimum margin as per the original PDP agreement.

2) Conversion of the MRT 2 above ground contract from project delivery partner (PDP) to turnkey at an outstanding contract value of RM6.1bn (50% share, to be included as order book) or 23% lower than the revised cost of RM16.7bn (including variation order (VO) of RM1.2bn).

3) Imputed more conservative surplus values (estimated market price less land cost) for its major outstanding land banks in Rawang, Dengkil and Vietnam, taking into consideration the development time lines and market conditions.

4) Fine-tuning the balance sheet portion of RNAV to exclude the asset value of 40%-owned Splash following the divestment recently, leaving the cash proceeds of RM1bn at 0.75x P/BV.

For Gamuda’s infrastructure prospects, the only consolation/upside to its longer term outlook is the implementation of the RM16bn Penang Transport Masterplan (PTMP). 

This is the only remaining PDP-model project for the group, and the only remaining PDP-structured land-swap contract for the sector, despite the new government’s stance of not favouring the PDP model. 

Although the PTMP would reposition Gamuda as the next big player in Penang, CIMB Research thinks it is unlikely to translate into an immediate boost to order book, as the reclamation of the 4,500-acre land may be top priority for the first two years.

A potential upside would be if there is surplus from the estimated RM2bn-2.8bn bridge financing which would enable the LRT Bayan Lepas contract to be rolled out earlier. 

At this juncture, Gamuda expects the approval of the LRT Bayan Lepas railway scheme and the environmental impact assessment (EIA) for the land reclamation to be granted by end-2018. Gamuda reckons the PDP terms should be signed in early 2019.

“In all likelihood, and assuming sufficient bridge financing is raised, the land reclamation process is only targeted by Gamuda to commence in mid-2010 (or 1.5 years from end-2018 vs. earlier guided timeline of 2H19). 

“This, we believe, would allow ample time for SRS Consortium (the PDP JV 60%-owned by Gamuda) to finalise the land reclamation, development masterplan, and its potential direct participation (if any) on either the Bayan Lepas LRT project or the Pan Island Link (PIL) contract. PTMP is not factored into our forecasts and RNAV,” it said.